The long tail of building energy efficiency

Building energy efficiency isn’t easy. If it was, after all, the opportunity wouldn’t be out there for building owners, third party providers, and tenants to capitalize on. As we’ve mentioned, there are a number of barriers to energy efficiency that make it hard.

Today I would like to focus on how many of these barriers can really be lumped into the same class of issues relating to the fact that buildings, and many of the aspects related to making them efficient, demonstrate the properties of a long tail.

That is, if you were to graph the number of buildings in the US, with the size of each building in square feet (SF) on the y-axis and the number of buildings of that size on the x-axis, you would notice that the left hand side of the curve is very steep, as a few buildings (the Pentagon, Empire State Building, etc) are very, very large. However, after you get past these (relatively) few buildings, the size of the buildings rapidly drops off. Thus at the right hand side of the curve you see a very large number of very small buildings.

This is somewhat unsurprising. Drive through any American city and you’ll notice far more low-rise and small commercial buildings than you will large buildings.

What is surprising however is what happens when you aggregate all of these buildings together. For example, if you take that same chart from above and multiply the number of square feet by the number of buildings, you find out that in aggregate, the square footage of buildings under 100,000 square feet accounts for nearly 2/3 of building area. In other words, while the size of each building over 100,000 square feet is much much larger, in aggregate, they make up only 1/3 of the building area in the US.

Put another way, while each individual building under 100,000 square feet is insignificant in terms of contribution to overall national floor space, when you add up all the buildings of this size, it becomes EXTREMELY significant; in fact, much more significant than all those large buildings combined.

So what does this mean for energy efficiency? Well to start, the most significant driver of gross energy use in buildings is square footage. So this long tail phenomenon means that this long tail of buildings makes up the majority of building energy use(1).

The real difficulty of the long tail is two-fold.

First, the problem is ubiquitous, in the sense that virtually every building could make economically attractive investments to reduce energy use. However, the solutions are not at all ubiquitous. While some solutions can be more global, like installing the same kind of LED light in every building, most of the solutions are building-specific, i.e. more insulation here, a tankless water heater over there. So in order to figure out what should be done to any particular property, the retrofit requires time and thought on the part of building scientists, project engineers and owners. The result then is that the transaction costs become prohibitively high. After all why spend the time running analysis on how to retrofit a 75,000 square foot commercial building when it probably won’t take all that much more time for retrofit analysis of a 500,000 square foot project?

Similarly, just like any retrofit project, these projects require upfront capital investment. However, the owners and operators of buildings in the long tail are those least likely to be able to put additional capital into retrofit projects. While a non-institutional owner may be starved for capital to make all desired improvements to their building, access to capital is just a much lower barrier for an owner like the government or a REIT or a pension fund whose buildings also tend to be much larger.

Moreover the relative size of energy efficiency investments at smaller buildings tends to make it more difficult for financial investors to aggregate projects. For an investor with lots of cash, it’s difficult to justify spending the time and due diligence needed for a $100,000 investment in energy efficiency in a smaller size commercial building when even strong returns would result in $20,000 – $30,000 per year. Many institutional investors find it difficult to make investments below $5 to $10 million. When transaction and time costs are added in, investments in building energy efficiency generally appear less attractive than much larger investments where the fixed transaction costs can be spread over a wider base.

So if we think about it, the Y axis of the long tail could refer to square feet by building, or it could refer to the MWh savings potential at each building. Taking this line of thinking further, it could also chart the dollar cost of energy savings at each building, or even the capital needed to retrofit each building. Investment at a building level tends to be much larger on the left side of the curve, but investments at the market level tend to be larger on the right hand side.

In every case, the fundamental issue that needs to be solved is how to effectively and efficiently aggregate these small retrofits. It’s a problem that remains exceedingly difficult to deal with, which is why a lot of the ESCOs and related energy efficiency investment dollars focus their activity on big buildings, or why it makes so much sense to do a retrofit at the Empire State Building. And again, as we know, there is plenty of work to be done just retrofitting the big buildings that make up the fat part of the tail.

But as with any problem worth solving, the long tail also represents a massive opportunity. After all, the genius of Google’s business is its ability to grab long the tail of search keywords and make money selling cheaper advertisements to small merchants. An opportunity just as big is waiting out there for a business who can figure out how to relentlessly drive down transaction costs and drive capital to energy efficiency in the long tail.

(1) This assumes that these buildings use the same amount of energy per square foot. CBECS data shows buildings between 1,000 SF and 10,000 SF use 88.8 thousand BTU / SF and buildings between 10,001 SF and 100,000 SF use 75.5 thousand BTU / SF. On the other hand large buildings over 100,000 SF on average consume 109.5 thousand BTU / SF. So the tail for energy efficiency would be flatter than the one shown above, but the same fundamental shape.